Sempra Energy 10-Q Summary
Reporting period: Three months ended March 31, 2016. The combined filing covers Sempra Energy, wholly owned SDG&E, and wholly owned SoCalGas. Financial statements are unaudited and presented under U.S. GAAP.
Business Context
Sempra Energy is an energy infrastructure holding company with regulated California utilities, South American utilities, Mexican energy infrastructure, renewable generation, natural gas pipelines and storage, and LNG-related businesses. SDG&E provides electric and natural gas services in the San Diego region; SoCalGas distributes and stores natural gas across most of Southern and portions of central California.
Key Financial Metrics
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Sempra revenues | $2,622 million | $2,682 million | Down 2% |
| Sempra earnings attributable to common shareholders | $319 million | $437 million | Down 27% |
| Sempra diluted EPS | $1.27 | $1.74 | Down 27% |
| Sempra diluted net margin | 12.2% | 16.3% | Down 4.1 percentage points |
| Common dividends declared per share | $0.76 | $0.70 | Up 9% |
| Operating cash flow | $592 million | $811 million | Down 27% |
| Capital expenditures | $971 million | $780 million | Up 24% |
| Cash and cash equivalents | $376 million | $377 million | Essentially unchanged |
| Total debt, including current portions | Approximately $15.2 billion | Approximately $14.7 billion | Higher year to date |
Segment and Subsidiary Results
| Entity or segment | Q1 2016 earnings | Q1 2015 earnings | Key change |
|---|---|---|---|
| SDG&E | $129 million | $147 million | Down 12% |
| SoCalGas | $195 million | $214 million | Down 9% |
| Sempra South American Utilities | $38 million | $41 million | Down 7% |
| Sempra Mexico | $17 million | $47 million | Down 64% |
| Sempra Renewables | $13 million | $13 million | Flat |
| Sempra Natural Gas | $(36) million | $2 million | Declined primarily from impairment and lower marketing results |
SDG&E reported $991 million of operating revenue, $130 million of net income, and $369 million of operating cash flow. SoCalGas reported $1.033 billion of operating revenue, $195 million of net income, and $241 million of operating cash flow.
Material Changes Versus the Prior Comparable Period
- Consolidated earnings fell $118 million, primarily from higher non-refundable operating costs at the California Utilities, the absence of a 2015 SONGS plant-closure adjustment, a $24 million after-tax Mexican deferred tax charge, a $27 million after-tax Rockies Express impairment, and higher parent interest expense.
- Energy-related business revenue declined $80 million, or 31%, largely because of the 2015 sale of the remaining Mesquite Power block, lower natural gas prices and volumes, and weaker midstream marketing results.
- California Utilities results were pressured because the 2016 General Rate Case decision had not been finalized; revenues therefore continued to reflect 2015 authorized levels while operating costs increased.
- Operating cash flow declined $219 million, mainly because of $335 million recorded as an insurance receivable for Aliso Canyon expenditures and approximately $307 million of related cash spending.
- Investing cash use increased to $989 million, including $971 million of property, plant and equipment expenditures. The company expects approximately $5.5 billion of capital expenditures and investments in 2016.
- Financing provided $364 million, principally from a $531 million increase in short-term debt. Consolidated short-term debt increased to $1.177 billion from $622 million at December 31, 2015.
- Cash declined by $27 million during the quarter. Sempra reported approximately $3.1 billion of available unused capacity on its principal committed credit facilities and $876 million of available unused capacity at foreign operations.
Guidance, Outlook, Risks and Unusual Items
- Capital plan: Expected 2016 capital expenditures and investments are approximately $5.5 billion, including $2.7 billion at the California Utilities and $2.8 billion at other subsidiaries. The filing does not provide consolidated earnings or EPS guidance.
- Aliso Canyon: SoCalGas recorded estimated leak-related costs of $665 million, a $302 million reserve for amounts expected to be paid after March 31, and a $660 million insurance receivable. Insurance recovery is subject to policy limits, exclusions and disputes. The company states that costs, fines, penalties, damages and regulatory requirements could materially exceed current estimates.
- As of April 28, 2016, 138 lawsuits had been filed concerning Aliso Canyon, along with governmental investigations and civil and criminal proceedings. The facility remained subject to an injection moratorium and represented approximately 63% of SoCalGas-owned storage capacity, creating reliability and potential impairment risks. Its net book value was $415 million.
- Regulatory rate cases: The CPUC had not finalized the 2016 GRC. A pending tax-related proposal could reduce future revenue requirements and could cause a material charge for amounts in tax memorandum accounts.
- Wildfire recovery: SDG&E recorded approximately $363 million of regulatory assets for 2007 wildfire costs. If recovery is no longer considered probable, the potential after-tax charge was estimated at up to approximately $213 million.
- Asset sales: Sempra agreed to sell its 25% Rockies Express interest for approximately $440 million, with closing expected in the second quarter of 2016, and recorded a $44 million pretax impairment. Management also classified the 625-MW Termoeléctrica de Mexicali plant as held for sale and expects a sale in the second half of 2016.
- In April 2016, Sempra agreed to sell Mobile Gas and Willmut Gas for approximately $323 million in cash, with the buyer assuming approximately $67 million of debt. The transaction remained subject to regulatory approvals.
- Sempra Natural Gas expected a second-quarter 2016 charge of approximately $100 million to $120 million from permanently releasing uncontracted Rockies Express capacity.
- Sempra maintains a completion guarantee for 50.2% of Cameron LNG project debt, or a maximum principal amount of approximately $3.7 billion, until specified project completion conditions are met.
- Other risks include regulatory disallowances, pipeline safety costs, commodity and foreign-exchange volatility, project execution and financing risks, cybersecurity, litigation, environmental obligations, and counterparty performance.
Investor Verification Checklist
- Verify the final CPUC decision on the 2016 GRC, including the treatment of tax memorandum accounts and resulting revenue requirements.
- Track Aliso Canyon insurance recoveries, reserve revisions, litigation, regulatory penalties, mitigation obligations and the potential effect on the facility’s carrying value.
- Confirm completion and proceeds from the Rockies Express, Termoeléctrica de Mexicali, and Mobile Gas/Willmut Gas transactions, including the expected capacity-release charge.
- Assess whether the approximately $5.5 billion 2016 capital plan remains on schedule and within budget, particularly at the California Utilities, Cameron LNG, Mexico and renewable projects.
- Monitor SDG&E’s wildfire cost-recovery proceeding and the potential exposure to the estimated $213 million after-tax charge if regulatory recovery is denied or reduced.
- Review debt maturities, short-term borrowings, credit-facility availability and the Cameron LNG completion guarantee as capital spending continues.